Yet not every second provides a high-probability trade.
Apply the test whether you're a day traderswing trader or investor. Key Takeaways Regardless of your trading strategy, success relies on being disciplined, knowledgeable, and thorough. Here, we go program for exact closing of an order in trading five simple steps to carry out before undertaking any trade.
These involve understanding you strategy and plan, identifying opportunities to know your entry and exit targets, and knowing when to abandon a bad trade. For example, if you're a trend-following traderthen a trend needs to be present. Your trading plan should define what a tradable trend is for your strategy.
This will help you avoid trading when a trend isn't there. Think of the "setup" as your reason for trading. Figure 1 shows an example of this in action. The stock price is moving higher overall, as represented by the higher swing highs and lowsas well as the price being above a day moving average.
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Your trade setup may be different, but you should make sure that conditions are favorable for the strategy being traded.
Figure 1. If your reason for trading—the setup—is present, then proceed to the next step. Step 2: The Trade Trigger If your reason for trading is present, you still need a precise event that tells you now is the time to trade. In Figure 1, the stock was moving in an uptrend for a the entire time, but some moments within that uptrend provide better trade opportunities than others. Other traders like to buy during a pullback.
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Both of these are precise events that separate trading opportunities from the all the other price movements which you don't have a strategy for.
Figure 2. What your exact trade trigger is depends on the trading strategy you are using.
The first is a consolidation near support: The trade is triggered when the price moves above the high of the consolidation. The third trigger to buy is a rally to a new high price following a pullback or range.
Before a trade is taken though, check to make sure the trade is worth taking. With a trade triggeryou always know where your entry point is in advance. For example, throughout July, a trader would know that a possible trade trigger is a rally above the June high.
That provides time to check the trade for validity, with steps three through five, before the trade is actually taken.
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Step 3: The Stop Loss Having the right conditions for entry and knowing your trade trigger isn't enough to produce a good trade. There are multiple ways to place a stop loss. Figure 3.
Step 4: The Price Target You now know that conditions are favorable for a trade, as well as where the entry point and stop loss will go. Next, consider the profit potential. A quick earnings ready for anything target is based on something measurable and not just randomly chosen. Program for exact closing of an order in trading patterns, for example, provide targets based on the size of the pattern.
Trend channels show where the price has had a tendency to reverse; if buying near the bottom of the channel, set a price target near the top of the channel. Added to the triangle breakout price, that provides a target of 1.
If trading a triangle breakout strategy, that is where the target to exit the trade at a profit is placed. Establish where your profit target will be based on the tendencies of the market you're trading.
A trailing stop loss can also be used to exit profitable trades. If using a trailing stop loss, you won't know your profit potential in advance.
Step 5: The Reward-to-Risk Strive to take trades only where the profit potential is greater than 1. In Figure 3, the the risk is pips difference between entry price and stop lossbut the profit potential is pips. That's a reward-to-risk ratio of 2. If using a trailing stop loss, you won't be able to calculate the reward-to-risk on the trade. However, when taking a trade, you should still consider if the profit potential is likely to outweigh the risk. If the profit potential is similar to or lower than the risk, avoid the trade.
That may mean doing all this work only to realize you shouldn't take the trade. Avoiding bad trades is just as important to success as participating in favorable ones. Other Considerations The five-step test acts as a filter so that you're only taking trades that align with your strategy, ensuring that these trades provide good profit potential relative to the risk.
Add in other steps to suit your trading style.
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For example, day traders may wish to avoid taking positions right before major economic numbers or a company's earnings are released.
In this case, to take a trade, check the economic calendar and make sure no such events are scheduled for while you're likely to be in the trade. The Bottom Line Make sure conditions are suitable for trading a particular strategy.
Set a trigger that tells you now is the time to act. Set a stop loss and target, and then determine if the reward outweighs the risk. If it does, take the trade; if it doesn't, look for a better opportunity. This may seem like a tedious process, yet once you know your strategy and get used to the steps, it should take only a few seconds to run through the entire list.
Making sure each trade taken passes the five-step test is worth the effort. Compare Accounts.